How UDAY is going to help transform India's Power Distribution System

India is the fifth largest producer and consumer of electricity with a capacity of 302 gigawatts (GW). It is expected to become a power-surplus country this year, for the first time since Independence, with an energy surplus of 1.1% and a peak surplus of 2.6%.ET Bureau | October 26, 2016, 11:27 IST

India is the fifth largest producer and consumer of electricity with a capacity of 302 gigawatts (GW). It is expected to become a power-surplus country this year, for the first time since Independence, with an energy surplus of 1.1% and a peak surplus of 2.6%. This would have been a remarkable feat but for the fact that almost 30 crore people in the country are still waiting to harness the benefit of electricity. Considering the fact that the per capita demand for electricity in the country has grown from 98 kilowatt-hour (kWh) in 1971 to 914 kWh in 2013, just in order to bring light in the life of the 25% of the country's population, which is currently deprived from the benefits of electricity, India will have to cover a great distance before it can truly become a power surplus country.

The power sector has witnessed admirable improvements over the last few years across the entire value chain, from fuel supply (highest coal production growth in over two decades), to generation (highest ever capacity addition), transmission (highest ever increase in transmission lines) and consumption (over 2.3 crore LED bulbs distributed). The weakest link in the value chain is distribution, wherein Discoms (power distribution companies) in the country accumulated losses of about Rs 3.8 lakh crore and outstanding debt of about Rs 4.3 lakh crore in 2014-15, with interest rates upto 14-15%. Due to legacy issues, Discoms are trapped in a vicious cycle with operational losses being funded by debt.

Discoms suffer losses either due to technical reasons or commercial reasons. Losses due to technical reasons can be minimised by using latest technology and modern equipment for transmitting and distributing electricity. At the commercial level, the losses incurred can be managed by resisting the pressure to provide electricity for free to certain groups; pricing the electricity by taking into account the input, production, transmission and distribution cost along with a healthy profit and not based on political expediency; and reducing the cases of electricity thefts by unscrupulous people or entities.

The challenge before the union government has been to create a reliable and sustained power generation and distribution mechanism in the country such that adequate, affordable and consistent electricity supply can be made available to all the private citizens together with the key sectors of the economy - agriculture, manufacturing and services - which in turn would ensure a healthy and continued growth in all the three sectors. Financially strained Discoms fail to supply adequate power at affordable rates, which hampers the quality of life and overall economic growth and development. Thus schemes which aim at 100% village electrification, 24X7 power supply and clean energy etc cannot be turned into reality without financially strengthening the Discoms first. This realisation paved the way for the union cabinet, chaired by Prime Minister Narendra Modi, to give its approval to a new scheme in November 2015 -- Ujwal Discom Assurance Yojna or UDAY -- moved by the power ministry. UDAY provides for the financial turnaround and revival of Discoms.

UDAY seeks to empower loss making Discoms to break even in two-three years by helping the Discoms in improving their operational efficiencies (compulsory smart metering, upgradation of transformers, popularising LED bulbs), reducing the cost of power (increased supply of cheaper domestic coal, liberal coal swaps from inefficient to efficient plants, supply of washed and crushed coal, faster completion of transmission lines), minimising their interest cost (states to take over 75% of Discom debt as on 30 September 2015 over two years -- 50% of Discom debt to be taken over by states in 2015-16 and 25% in 2016-17; Discom debt not taken over by the state to be converted by the banks into loans with interest rate not more than the bank's base rate plus 0.1%; and states to fund at least 50% of the future losses of Discoms) and enforcing financial discipline on them through their alignment with state finances.

The scheme is operationalised through a tri-partite agreement between the union ministry of power, the state government and the Discom. Though, adopting UDAY is optional for states, 16 states have already adopted it. According to reports, of the 16 states which are part of the scheme, at least eight -- Bihar, Uttar Pradesh, Jharkhand, Chhattisgarh, Goa, Uttarakhand, Rajasthan and Andhra Pradesh -- have shown a decline in their distribution losses. For instance, in Uttar Pradesh, the gap, between the cost of electricity generation and supply and the revenue earned out of selling it declined by over 65%, i.e. from Rs 1.17 per unit as on March last year to Re 0.41 per unit for this year (ending March 2016). The interest burden of Uttar Pradesh power distribution companies nearly halved to Rs 820 crore during April-June this year against Rs 1,742 crore in the corresponding quarter last fiscal. Likewise, the commercial losses in Jharkhand after joining UDAY declined to 31.8% during the first quarter of the current fiscal year from the earlier 41%. According to reports, the average power generation cost in the country came down by 13% to Rs 2.77 per unit during the quarter ending June 2016 from Rs 3.19 per unit during April-June of 2015.

However, distribution companies of Punjab and Karnataka have reported an increase in their losses even after joining UDAY. This shows the weakness in UDAY which assumes that states will have similar results by improving their operations. Various state specific dynamics have apparently been not taken into account in its design. Perhaps that explains why states like West Bengal and Tamil Nadu have not yet signed up for UDAY. The West Bengal government has objection to conditions like regular revision of power tariff and cutting the transmission and distribution losses as it feels regular revision of power tariff would unnecessarily burden the people of the state and cutting the transmission and distribution losses would mean billing even the poorest consumers down to the last paisa for every unit of supplied power. The government is also concerned about an additional debt burden on the state exchequer.

According to reports, currently Haryana, Gujarat, Bihar, Punjab and Rajasthan have fulfilled 30-45% of the commitments made under UDAY. While Uttar Pradesh, Bihar, and Jharkhand need improvement with below 30% progress. Jammu & Kashmir lags far behind delivering just 15% of the promises made under UDAY. The performance of state distribution companies implementing UDAY is measured on 14 operational and financial parameters, which include reduction in technical and commercial losses, reduction in gap between per unit cost of power supply and realisation, household electrification, smart metering, profit and loss accounts and the distribution of LED lights. The scheme is monitored at the distribution company level by its chairman and at the state level by the chief secretary or the principal energy secretary. However, it is not clear what would be the consequences for the states if they do not deliver and fail to meet targets which can pose to be a huge challenge in the overall success of the scheme.